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By Peter Ferrara

The Washington Post proclaimed editorially on March 21, “There is no credible path to deficit reduction without a combination off spending cuts and revenue increases.” They insisted that this “is the fundamental failure of the budget blueprint released Tuesday by House Budget Committee Chairman Paul Ryan.”

But this criticism is factually wrong as a matter of simple mathematics. Under CBO’s score of the Ryan budget, federal revenues virtually double over the next 10 years from $2.444 trillion today to $4.601 trillion by 2022. That is one whopping revenue increase, roughly $2.2 trillion, which is more than the entire GDP of almost every other country in the world.

And we know for certain that the revenue increase will be much more than that. That is because under CBO’s simple minded static scoring no credit is given for the extra revenues resulting from increased economic growth due to the proposed tax rate cuts in Ryan’s budget.

Ryan proposes to reduce the current 6 federal income tax rates to just 2, 10% and 25%. He has previously said the 10% rate would apply to couples earning less than $100,000 a year, and singles earning less than $50,000, with the 25% rate applying to incomes above that. But in the budget he rightly leaves those precise thresholds and the deductions and credits to be eliminated in the tax reform to the House Ways and Means Committee as they determine necessary to leave the whole reform revenue neutral.

Ryan also proposes to reduce the federal corporate income tax rate from 35% to 25%, the same rate as in China. That 25% rate is the international average, and Ryan’s proposed reduction is the minimum necessary to restore international competitiveness to American business.

Such rate reductions would stimulate increased production because the marginal tax rate, the tax rate applied to the last dollar of earnings, controls the incentives for production. It is the tax rate that determines how much the producer is allowed to keep out of what he or she produces. For example, at a 25% tax rate, the producer keeps three-fourths of his production. If that rate is increased to 50%, the producer keeps only half of what he produces, reducing his reward for production and output by one-third. Incentives are consequently slashed for productive activity, such as savings, investment, work, business expansion, business creation, job creation, and entrepreneurship. The result is fewer jobs, lower wages, and slower economic growth, or even economic downturn.

In contrast, if the tax rate is reduced from 50% to 25%, what producers are allowed to keep from their production increases from one-half to three-fourths, increasing the reward for production and output by one-half. That sharply increases incentives for all of the above productive activities, resulting in more of them, and more jobs, higher wages, and faster economic growth.

Under more realistic dynamic scoring taking these effects into account, the rate cuts would not lose as much revenue as the CBO expects, and so the growth in revenues would be even more than it estimates as reported above. Public policy needs to be made based on the most accurate estimate of the effects of the proposed changes. But the failure to take into account these dynamic effects has led to gross errors in estimated effects from rate cuts in the past.

In 1997, when Congress was considering a cut in the capital gains rate from 28% back down to 20%, CBO and the Joint Tax Committee (JTC) estimated that revenues would increase by $7.8 billion from 1997 to 1999, but produce a loss of $28.8 billion over the following 7 years, for a net loss of $21 billion over the 10 year period. The actual numbers after the tax cut was passed showed an increase of $84 billion over the pre-tax cut projections for 1997 to 2000, despite an almost 30% cut in the rate.

Similarly, when Congress considered cutting the capital gains rate again in 2003, from 20% to 15%, CBO and the JTC estimated that this would cause a loss of revenue of $5.4 billion from 2003 to 2006. But after Congress passed the tax cut, capital gains revenues increased by $133 billion during those years, as compared to the pre-tax cut projections.

President Kennedy understood it. He proposed legislation to reduce income tax rates across the board by nearly 30%, explaining,